Imbalanced Budget: Ryan Gives Wealthy a Free Pass

11 Apr 2011

Posted by Bruce Bartlett

House Budget Committee Chairman Paul Ryan’s budget plan has been the talk of Washington this week. Most of the discussion has revolved around his proposal to privatize Medicare and slash many federal programs to the bone. Less attention has been paid to the tax side of Ryan’s plan, which is every much as radical as the spending side.

One would think that a comprehensive budget proposal designed primarily for the purpose of reducing budget deficits and the national debt would put at least some of the burden on the revenue side of the equation. First, it would reduce the need to cut spending so heavily and improve the chances of passage; unless Ryan is only interested in scoring points with the Tea Party crowd, he will need the support of at least some Senate Democrats and President Obama if he wants any aspects of his plan enacted.

Second, Ryan’s plan puts an exceptionally heavy emphasis on cutting programs like Medicaid and food stamps that primarily aid the poor, while the well-to-do are essentially held harmless because they don’t benefit much from federal spending. The one government spending program that arguably benefits the wealthy disproportionately is national defense because, as UCLA economist Earl Thompson has argued, it protects their capital. And that’s the one major program Ryan lets off the hook almost completely.

For Ryan, it is an article of faith that federal revenues must never rise above 19 percent of the gross domestic product no matter how dire the nation’s debt problem. No explanation for this necessity is offered in his plan, other than observing that the historical range of federal revenues as a share of GDP has been between 18 percent and 19 percent of GDP during most of the postwar era. Ryan simply asserts, without evidence, that this range is the one most compatible with prosperity.

Conservatives dogmatically believe that taxation is the single most important factor in economic growth, and the lower taxes are the better. But if that were the case, then the late 1990s should have been a period of exceptionally slow growth: Federal taxes averaged 19.9 percent of GDP from 1997 to 2000. In fact, that period was among the most prosperous in American history, with real GDP growing an average of 4.5 percent per year. By contrast, during the last four years, federal revenues have been exceptionally low, averaging just 16.5 percent of GDP. But growth averaged less than 1 percent per year.

Ryan Cites Letter from the CBO

Of course, there are many factors that affect economic growth. Economists universally agree that the major factor in long-run growth is technological advancement, and in the short-run the Federal Reserve’s monetary policy dominates. Taxes play a role, but so do a lot of other things, including federal budget deficits, which can reduce growth by raising real interest rates and crowding private investors out of credit markets.

In his plan, Ryan sets up a straw man by implying that the only alternative to his proposal is to raise tax rates. He cites the Congressional Budget Office as saying that the tax rates necessary to sustain the nation’s current fiscal trajectory “would end up sinking the economy.” But the report Ryan cites a letter to him from the CBO responding to a request by him to calculate the impact of reducing future deficits solely through marginal tax rate increases, with no spending cuts at all – something no one is proposing. While the CBO did indeed find that this would be harmful to growth, it also pointed out that alternative methods of raising revenue, such as broadening the tax base, would have substantially less negative effects on growth.

Ryan’s plan pays lip service to base broadening, but mentions no specific tax credits or deductions he would eliminate. That’s because the largest tax expenditures are things such as the exclusion from income of employer-provided health insurance, the deduction for mortgage interest, and the deduction for contributions to 401(k) pension plans that are very popular, politically. When asked by TIME magazine to name a single tax preference he would get rid of to broaden the base, Ryan refused to do so, saying it was up to the House Ways and Means Committee to figure it out.

Ryan’s aversion to intruding on the turf of the Ways and Means Committee would be commendable if he hadn’t specified that his budget plan would require cutting the top corporate and individual income tax rates to a maximum of 25 percent. When the CBO analyzed Ryan’s plan, it could not confirm that his tax proposal would in fact raise the 19 percent of GDP he claims it would. That figure was simply asserted by Ryan’s staff. An analysis by the Tax Policy Center of an earlier Ryan proposal similar to this one, which Ryan also asserted would raise 19 percent of GDP in revenues, found that it would raise just 16.8 percent of GDP in revenues.

Crunching the Numbers

Ryan got around this problem by ignoring the Joint Committee on Taxation, Congress’s official revenue-estimating agency, and instead asking the ultra-conservative Heritage Foundation to crunch the numbers for him. Its analysis says that economic growth would be so extraordinary from enactment of the Ryan plan that the unemployment rate would fall two full percentage points next year alone, and continue to fall to less than 3 percent by 2020 – a level not seen since 1953. This massively higher growth leads to higher federal revenues – $58 billion more next year alone over those that would be collected without the Ryan plan.

A number of respected public finance economists quickly ridiculed the Heritage numbers as grossly implausible. MIT economist Jonathan Gruber said, “The Heritage numbers are insane.” In response to such criticism, Heritage simply deleted some of the more extravagant figures from its analysis.

Distributionally, the Ryan plan is a monstrosity. The rich would receive huge tax cuts while the social safety net would be shredded to pay for them. Even as an opening bid to begin budget negotiations with the Democrats, the Ryan plan cannot be taken seriously. It is less of a wish list than a fairy tale utterly disconnected from the real world, backed up by make-believe numbers and unreasonable assumptions. Ryan’s plan isn’t even an act of courage; it’s just pandering to the Tea Party. A real act of courage would have been for him to admit, as all serious budget analysts know, that revenues will have to rise well above 19 percent of GDP to stabilize the debt.

First off, we already know that Paul Ryan doesn't care about the deficit. He voted for Medicare Part D, against allowing negotiations to reduce its cost, for the Bush tax deferrals, and supported the invasion and occupation of Iraq. He just doesn't care.

As you point out, there's no reason, in human experience, to think that reverting taxes to surplus-era levels would be harmful to the economy. We know that. The 1990s went quite well.

The question is, what's motivating these radicals who call themselves conservatives? It appears that the Wall Street wing of the party wants to hold on to as much money as possible regardless of the consequences for America, and the Tea Party is mad at the government for making them desegregate their schools. There's no rational economic theory behind their actions.

This plan is a total fraud as Ryan. It'ss being offered to see if anything will stick and to use as a baseline in negotiations. Unfortunately, we all now how that will turnout. What's that? Obama just came out with his own deficit reducton plan? Oh for a Democrat in the Whitehouse. And Congress.

"Paul Ryan, the Republican Party’s latest entrant in the seemingly endless series of young, prickish, over-coiffed, anal-retentive deficit Robespierres they’ve sent to the political center stage in the last decade or so, has come out with his new budget plan. All of these smug little jerks look alike to me – from Ralph Reed to Eric Cantor to Jeb Hensarling to Rand Paul and now to Ryan, they all look like overgrown kids who got nipple-twisted in the halls in high school, worked as Applebee’s shift managers in college, and are now taking revenge on the world as grownups by defunding hospice care and student loans and Sesame Street. They all look like they sleep with their ties on, and keep their feet in dress socks when doing their bi-monthly duty with their wives."

Thanks as ever Bruce for casting a cold eye on simplistic and one-dimensional solutions. I work with middle market business owners and am one myself, so I think I have some perspective on what changes in tax rates do to investment. The answer is, I believe, very little. The concept that reducing taxes will spur investment/productivity/wealth is theoretically attractive but I don't believe it has any empirical support except at the fringe i.e. 60+% marginal tax rates do impede investment, work etc. but at rates below about 50% companies and their owners will not change behavior significantly even with significant moves. The concept that an entrepreneur who would have started a business or created a new technology if his expected tax rate on his gains would be 25%, will not start that business if the rules changes to 40%, is an idea developed by someone who reads the WSJ editorial page, not someone who has taken that leap in recent memory themselves. Taxing capital gains or earned income at any real-world rates is a matter of politics, not economics. But lack of revenue to government will have very real, negative, economic consequences.

This claim that businesses would hire and/or invest if only their tax burdens were lighter has always put me in mind of Hoover, back in the day, begging employers to just keep their workers on the payroll as their markets were disappearing around them.

And it's remarkable to me that the very same people who tell us that businesses will hire and/or invest when they pay less in taxes are usually the *same* ones who tell us that business people can only do what's good for the bottom line or the shareholders would have their hides. I don't see how both things can be true at the same time, because I've never understood how any business could even think of spending more if the market isn't there. Some superstitions I'll fall for, but not this one.

Thanks, Rob, for real-world confirmation that at current levels, taxes just aren't that big a factor in decision-making.

If he's sincere, then he voted for Medicare Part D, the Bush tax deferrals, etc. because... he's stupid? Because he is a sincere believer in starve the beast? (In which case, we might need to revert to the previous theory).

Given his record in his decade-plus in Congress, I'm at a loss for what on Earth it is in which he truly believes.

Ryan approach to entitlent reform: for Medicare, it's the "Die early, Dude" approach. Private for-profit medical insurance of the elderly is an economic non-started because of adverse selection. The subsidy is a joke -- can't buy it if it isn't there. For Medicaid, it's "Look out, Gov," or leaving the financing and hard choices up to the state. If governors thought that Obamacare dumped on them, then they should be steaming from the ears and other orifices about the Ryan plan.

So it goes. Propose something silly and the media think you are a great statesman.

Good to have you and Pete back commenting! Two major points (and I haven't read the Ryan proposal to be honest). From the perspective of limiting and making more predictable Medicare's costs via premium support, Ryan's Medicare proposal makes a lot of sense. When you get into practical realities, it really breaks down. What about a health 65 year old vs. someone who's 80 and has say four chronic conditions? Or someone who's 75 and has diabetes mellitis? Or wealthy vs. non-wealthy? I actually think that it's possible to use existing Medicare and make substantive changes, and be within current law. We still will probably need Obame's 2014 Committee, but a lot could be changed now (I want to write an article re this). Also Medicaid block grants sound good, but different states are very different in their willingness to cover people - think Missisippi vs. New York. I also wonder if a big reason for Medicaid's high costs is (a) it's very low payments to MDs for these most difficult patients so that MDs don't join the network, (b) that Medicaid high neighborhods may not have good access to healthy foods, but this I don;t know... Anyway, I think the idea of Medicare premium support as a replacement is half baked. What between this and the Planned Parenthood debacle, I'm holding my bose and voting for Obama unless there's a 1/2 way decent Republican candidate.

I think I'm going to stop checking out this blog as often as I do. Half the posts offer some small bit of information, but are hardly insightful (that's you, Stan). Of the posts that actually offer some analysis, they can be summarized as: Republicans and conservatives are conniving, hypocritical and unserious because they are unwilling to raise taxes, end of story. Little to no mention is ever given to Democratic proposals or actions. Oh, the one time Bruce criticized Obama's budget, he came back a few days later to say that it's really not that bad. I think Stan praised Scott Walker once, but then he retreated back to his careful, let-me-not upset anyone, boring prose. God forbid he lose any contacts on Capital Hill. He's Mr. Softball.

In Bruce's article above, because it doesn't have a single sentence that finds a single good thing about Ryan's bill, he comes across as a ranting hack. I read it twice trying find out what's good in it. According to Bruce, there is not a single good thing in it. Bruce even criticizes Ryan for broadening the tax base because he doesn't offer specifics. But specifics in budget cuts are what kills politicians and bills, so of course they are avoiding it right now--no need to play your hand before it is necessary. This is true of all politicians, not jut Ryan. So, Bruce turns an attempt to raise revenues into a vice.

Seriously, this site has the feel of a Soros-backed enterprise. It is very one-sided in its criticisms, but hides behind a non-partisan image. dKos and HuffPo seem quaintly honest in their proud and open partisanship.

Yes, I'll continue to check back because I'm interested in analysis of budget proposals of both parties, but I've learned that this is the place to go to get some decent, but decidedly anti-Republican analysis. Criticism of Democrats or praise for Republicans when they play their cards well appears to be off-limits. I'm OK if you want to run your blog that way, but I can't get excited about it.

Did you read Ryan's plan twice to see if there's anything good in it? Sometimes a bunch of really bad ideas is just that, and it doesn't make you "partisan" to say so. If it seems like the Republicans don't have any good ideas it may be because, in their pandering to what James Brown would have called "Mr Loud and Wrong" and their sudden and convenient focus on the deficit, they've lost any sense of moderation.

Think you tipped your hand when you suggested the blog has "the feel of a Soros-backed enterprise."

I must take issue with your comment "...while the well-to-do are essentially held harmless because they don’t benefit much from federal spending."

Why so many people in this country, not just the wealthy, don't see how a healthy, upwardly-mobile populace doesn't benefit them personally is beyond me. How can they think a crumbling infrastructure doesn't hurt business? I don't believe they are actually stupid. Self-deception is for kids. It's time for them to grow up.

MBA schools should require students to try to do business in Russia. Or maybe Somalia. That might help them understand why we have a government.

I think our conservatives aren't in most part conservative (except socially), and can't tell the truth of their agenda as there are far more of us in the middle and lower classes (though they always give it away by what they want to cut and who they want to crush)than in the class that supports their agenda. That said I believe the only way back to true prosperity is to reduce big moneys role in campaigns (which even the Supreme Court will not do). Until then few if any from either party will bite down too hard on the hand that feeds it.

Big money is ever bigger even in this economy in large part by what government policies have given or failed to take from them, they in my opinion do not wish for this to change. They are short sighted, a smaller part of a robust economy in the long run would serve them better, they cannot or will not see it (or just as likely are only interested in raising capital here in the US while investing it in the booming Asian and Indian economies). They in the end will see the light or simply flee the teetering empire.

So the free pass stays intact until or unless you get the money in the system to equalize (political system)this seems unlikely until there is a crash the rich can't be saved from.

Posted by Just a dumb ole middle class jerk on Apr 13th, 2011 at 12:50 pm.

Just curious, why all the sudden interest in a balanced budget? The republicans ran the show for eight years with W and all they did was spend, spend, spend and cut taxes for the well off. Their priorities very were different than the vast masses. Social programs and building up this country's infrastructure are TOO expensive now? Green is not good for the country, but big oil is? Drill baby Drill? I don't get it.
Who believes that these people have anything in mind other than lining their campaign pockets with the money they shave off the wealthly's taxes. Cutting the poor and disenfranchised out is NO WAY to be. OMG, How much more do you guys need?The deficit will be fine if we take it slow. No drastic changes to put us back in ANOTHER republican caused recession.
Why are these the only voices heard? Someone should speak up. Moderation in all things, as the saying goes.

I'm not a NY Times fan, but the first sentence in their first editorial of April 13th ought to be abbreviated and emblazoned on billboards across the country: "[The House Republicans] want to cut spending on government programs over the next decade by $4.3 trillion. And they want to cut tax revenues over the same period by $4.2 trillion."

I am glad someone is doing something...You have to get through the skin to get down to the bone is all I know. I figure that after the initial cut down that people will soon know that more has to be done & do it eventually. They are starting with some things first, more guaranteed will have to follow.We are over leveraged & need very much to deleverage.

One thing I would personally like to see is that if the so called rich are getting the best tax breaks so they can provide jobs, stimulate the economy, etc, is that unless they provide verifiable jobs, that they don't see those good tax breaks unless they stimulate job growth. Maybe there should not be breaks unless they have a minimum number of jobs they provide too.

Let's face it, if we are all broke, then we are all had...

Posted by Yet Another Budget Wonk on Apr 16th, 2011 at 11:08 am.

CG&G is now on Forbes.com

Effective Feb. 28, 2014, Stan Collender's blog has a new home. Capital Gains and Games archives are available here, but for the latest posts, go to Forbes.com.